Time to buy oil: Fighting Bulls & Catching Knives

That’s about it for this time: The oil price is down to multi year lows, and below marginal cost of production (debatable), and thus I feel like buying some. This is not advice; here is the disclaimer.

The rest of this 15-minute article is an introspection into my own functional Asperger syndrome (a bit like Michael ‘Big Short’ Burry who made a fortune in the housing crash of 2008), my contrarian inclination, and why crowd independence can be a significant predictor of success in the stock markets.

Do you have similar personality traits and have you learned to benefit from them?

WTI Crude below 44

Dyed-in-the-wool contrarian

Oil is crashing – I’d better buy soon! (That’s what I did earlier this year, then sold when the bounce turned into an upward trend. Now I feel like buying again, just as people start panicking with WTI crude below 44 [I’ll buy Brent, though])

Gold is crashing – How soon can I get my hands on some (more)? (That’s what I thought about a year ago, and now again as gold is falling even deeper. I’m thinking more and more of getting physical)

The above trades went pretty well, but as a natural contrarian, I am usually wrong, or at least way too early (which amounts to the same thing). I also just never get to enjoy riding a trend for very long.

That’s how I’m wired; I don’t get caught up in crowd events like concerts or sports, and I instinctively distrust trends.

Growing up, I was often the odd one out. Or just plain odd. It took at least 30 more years before I realized why…

On the other hand, I assimilate facts at face value and I’m patient, really patient. In the long run*, I usually win (on the market) against the socialized lemmings that eventually fall off the cliff. They, however, typically feel better** most of the time.

* (unfortunately, that might be when we’re all dead – my current big market short might fall in that category)

** feeling at all counts as ‘better’ ; )

Being asocial made independent views natural

I hate people – or so I thought about a decade ago (N.B. I was 33 by then, so hardly a spring chicken). Then gradually I realized I just liked to be alone, reading, learning, thinking and solving problems (which was impossible with people around – imagine trying to concentrate sitting alone in a dark room, knowing there is a large venomous spider, snake or similar there with you).

In my late 30’s I eventually understood that I actually liked people; in the right doses, and in non-learning and non-performance contexts, and when I presented my conclusions from my alone-time. I never labelled myself with Asperger syndrome though – until just the last few years, when I was 35-40.

I’ve never been accused of jumping to conclusions. On the contrary, rather being a bit retarded ;)

Five-six year ago, I felt a kind of kinship with the Asperger-diagnosed investor Michael Burry, when he was portrayed in The Greatest Trade Ever (2009) and The Big Short (2010). At the time, however, I thought it was just wishful thinking that we shared any deeper similarities. “I’m a bit like Steve Jobs, I like Apple products too“.

I actually had read the (amazing) book “The curious incident of the dog in the night-time” by Mark Haddon 5 years earlier, in September 2005. It is written from a person with autism’s perspective. I did see some vague similarities, but mostly I got upset when the boy couldn’t control himself better… (sic), and it never struck me I could be diagnosed with a anything remotely similar to what Christopher had.

Discovering autism spectrum disorder

My closest friends and girlfriends (and their parents, not to mention mine) knew about my condition long before I did (I just learned yesterday that as early as 2002 or 2003, my girlfriend and her father discussed my potential autism due to my folding my underwear. Other close friends diagnosed me the first time we met, or so long ago that the exact timing is irrelevant).

Many immediately sensed I was different, but didn’t get a specific term for it until much later. Asperger wasn’t standardized as a diagnosis until the 1990s (and by then I had already gone to college to study finance and thus escaped the system)

They never said anything to me, which was probably for the best*.

*I sometimes wonder if I performed better not truly understanding my particular condition. Had I known, I might have tried to second guess myself, with unpredictable and unstable results. Trying to be contrarian is not a sustainable path; you’ll soon lose track of what is your true stance.

Advantage Asperger

Peter Thiel has quipped that entrepreneurs with functional autism spectrum disorder (“Aspergers”) have an (unfair) advantage in Silicon Valley. Among other things, they can benefit from having a more singular focus, less or no trouble with rejection or going against the grain, and sometimes even special skills.

Hedge fund managers often profit from the same characteristics*: being naturally contrarian, independent of herd behavior**, weighing wins and losses equally, being cool under pressure, unemotional, and generally thinking in absolutes and facts, rather than relativistically and fads. A big drawback, however, is the inability to ride trends* to their conclusion (bubble peaks, and depression troughs).

* Not all of course; far from it

** which brings back memories of when I thanked “the long only crowd for creating opportunities to go short which led to my fund’s win” (read more in my free eBook)

I’ve never felt comfortable in crowds. It’s not that I’m actively uncomfortable; I can stand by myself for hours just observing, but I have trouble following and participating in several conversations at once, in particular in noisy environments. And, more importantly, I hardly see any upside from being in a crowd, unless you hope to meet somebody new, or if you are normal and social and can appreciate the crowd vibe, that I never even perceive (alcohol helps though).

I think a big part of my hedge fund’s success was our independent thinking, our unbiased view of going long and short respectively, and not being connected with the European and UK hedge fund “clubs”. In as much, I am grateful for the personality traits I have, be they clinical ASD or not, even if they make me slightly handicapped socially.

Suspense and surprise

The inspiration for this article actually came from a recent Freakonomics podcast about movie and book plots (and news shows).

When the hosts and the guest proudly described how popular TV shows, movies and books often use a formulaic approach – with three major twists and a certain technique for maximizing the uncertainty (suspense) about the next step, as well as the eventual surprise – I almost felt physically sick.

That’s why I tend to not like ordinary books or TV shows. I want facts, or a story line that progresses from point A to point B, preferably with a message. If the facts are surprising, all the better, but please, please, hold the manufactured artificial suspense – in particular if you have no facts or bigger story to convey.

I guess that formula works for people who are interested in people

Some TV series exhibit a really good first season, where everything is thought through from the pilot to the season finale. Unfortunately right at the beginning of season two most fall back on a formula of single or double episode tasks and excursions, spiced with mostly annoying flash backs.

I guess that formula works for people who are interested in people, and who like the feelings that suspense and surprise provide. I just keep wondering, when will the real story materialize?! OK, back to business:

Oil, investing and Asperger

My style of research and analysis, as well as portfolio management was (and still is) pretty straight forward:

I checked the available facts. I made plausible assumptions about the future regarding the variables themselves, the operations and management of the companies and the stock market environment (including risk tolerance and valuation paradigm).

Then I recommended/bought whatever was really “cheap” (a very complex situation-dependent notion), sold whatever was really, really expensive (twice the margin of safety needed), and didn’t give a damn about the usually more than 90% of the market in between. The latter means I let my Excel models rest until something triggered (don’t ask) my interest in those companies again.

Then I waited. And waited. And waited… (well, I of course kept digging and looking for better opportunities, or reasons my investment was or had turned wrong. I also traded a bit on top of the basic investment – adjusting perhaps a fourth up or down depending on weekly and monthly fluctuations)

…Which leads us to oil. I made my first investments in oil early this winter/spring, 21 years after getting my first job in the finance industry. The same goes for gold, although I bought and sold my first batches of gold a year or two earlier. Pound Sterling and USD… Same story, with my first transactions in 2013-14.

The good thing with my particular point in the ASD spectrum is that as long as the facts don’t change, I am infinitely patient.

The drawback is that I get hamstrung regarding speculating, riding trends, joining fads. I can of course, I not sealed off from the real world, it’s just that it feels so uncomfortable I can only do it for very short periods of time if the variables are wrong.

-Unless I’m dealing with inherently worthless factors, such as fiat currencies and gold :). Then I can speculate with ease of mind.

Fighting Bulls & Catching Knives

So, oil, gold, what have you, drops sharply and suddenly my spider sense tells me to buy (I’m not talking about perma-bulls buying every little 10% dip. I’m talking about -40% at least), right when most people just want to get rid of their assets at any price.

Often, I short too early, fighting every bull I see, and then hang on to those shorts like a pit bull, all the way to the peak and down again.

Then I buy 40% down (if that’s enough to normalize the price or make the asset cheap), catching knives with both hands, and keep buying at -50%, -60%, -70% and so on, and hopefully make a decent return when fortunes turn – right before selling way too early again.

As long as I keep a sizable margin of safety and my sense of intrinsic value is well honed, I make good returns over the cycle. But in between, sometimes… (so be careful in trying to follow my lead; perhaps you are better off just buying and holding)

Oil, however, actually is quite a different story than gold or currencies (FX). Oil has a production cost, and a business value. And now the price has not only more than halved in short order, it is also way below assessments of marginal production cost (65 USD for Brent), even if we are going into a super recession in 2016-19 (before the Age of Machines and Solar start in the 2020s).

In the very short term, oil of course can, and probably will, fall even lower than right now, due to Saudi Arabia’s need of money, Saudi Arabia’s will to destroy the shale industry, the coming global recession and China slowdown and shadow banking implosion, general oil price trend etc.

On the other hand money will keep being printed, and the global economy will at worst stand still nominally before expanding again. Hence, my best guess is that the oil price will bounce back to at least the marginal cost of production (for a volume at least on par with demand today) within two years.

Do youknow yourself well enough to be trusted with your own money on the financial markets?

If you’re not completely sure, subscribe to my newsletter for future updates, and read my free eBook to get a sense of the psychological prerequisites for investing. Feel free to share this article with anybody you think might be interested.

And just a few facts to round off: A standard oil barrel contains 42 gallons or 159 litres and weighs a little more than 300 punds. The 42-gallon standard oil barrel was officially adopted by the Petroleum Producers Association in 1872 and by the U.S. Geological Survey and the U.S. Bureau of Mines in 1882, since the full-sized 84 gallon watertight barrel simply was too heavy to handle for one person.

32 Comments

If the arguments above would classify the diagnosis of Asperger’s, then I would have it as well, along with a lot of people I know that are disillusioned with society’s conformist behaviors. On gold, it appears that an accumulation is occurring reinforced by a positive divergence. It could still drop more, but I would argue that it would be a safer bet than going in on oil, especially since the drop has not stabilized yet.

The entire markets can stay irrational longer thn you can stay solvent thing makes me hesitant to do these kinds of things. Oil in this case is mostly one state actor, so maybe invest in the shale oil company basket vs the commodity?

I listened to an interview with Morgan Downey (the author of Oil 101). He had some really good arguments on why oil prices should go up in the long run.
So I definitely think you have a point here. I’m pretty tempted to buy some oil at these prices too, but I think I’ll wait just a little bit more. :)

First of all, thank you! I feel that I’m learning so much reading your blog and have reevaluated quite a few of my views on life in general and finance in particular based on your posts.

Question; Bitcoin? What is your take on it? Is it the future or a hox just waiting to blow up? I haven’t made up my mind yet but think cryptocurrency is some form or another might play a big part in future.

CCs will take over. I’m just not convinced it will be Bitcoin. Probably there will be more than one, perhaps millions. Every network could have a CC, you could use millions of different CCs yourself; your virtual agent will keep track.

I wouldn’t buy Bitcoin. Well, maybe I would, but not more than a median year’s wage (for the typical worker)

1) “Business as usual”: current over-supply of about 1.8m barrels/day will be gone in about 18 months as oil demand continues to grow (albeit at a lower rate than before as emerging markets aren’t that vivid) while US and Canadian crude oil production will at least half to about 6.5-7.0m barrels/day, North Sea continues to fall and some incremental additions coming from Iran, Saudi et al. Marginal cost of production after this transition should be about $65/barrel; in theory the market price for oil. Thus a 30-45% upside to WTI and Brent, probably more.

2) “Geopolitical crap and protectionism”: 7 of 16 Republican candidates for the Presidential elections in 2016 mentions “energy independence” as a target and some of the Democrats do too, but Hillary does not. China has vast unutilised shale gas and some oil resources. Saudi need money for swelling military budget as they are in deficit (and recently issued bonds for the first time in a long time). Russia’s budget sucks and military spending is back to 7-8% of GDP. And so on and so forth. Oil supply growth will continue to exceed demand. Marginal cost AFTER SUBSIDIES fall and WTI and Brent in the range of $30-40/barrel for years is the effect.

I think alternative 2 is much real. All the producers want a high price in the long term but they also need any money short term, hence the willingness to accept the lower price.

My take on the oil situation is that it is being shaped by this political situation. Since russians and saudis needs a lot of money for their expenses at the current and produce even at a lower price.

While much of the american production, in my understanding, needs a higher price to be really profitable. Here I have also caught that the Saudis does not want the american oil to intrude on their market share, which keept is seemed as more profitable for them in a long run. An other reason for them to keep up production at the lower price.

If the americans choice too support their industries for the sake of energy independance. It has also the side effect of continuing the pressure on Vladimir Putin which they welcome.

I find this interesting and I suspect prices to be pressured at least for a year but when the one of players described above cant take it anymore in this endurance race.

I agree with most of what you say, but think prices will fluctuate (under pressure) since real value is higher than current price (IMHO). Thus I have started buying and plan to A) periodically buy more during the coming 12 months as long as prices fall, B) sell my accumulated holdings anytime I have a decent profit and wait for new price falls

Interesting post.
Pretty cool how you combined an aspergers/autism discussion with some aspects of your personal life, while still talking fianance.

Makes it less dry to read.

As far as you being atleast slightly autistic, Micke, you studied physics, didn’t you?

If you want to be good at math/physics, you’ll likely have to be atleast slightly autistic.
I don’t think I’ve ever met somebody who studied either of them and didn’t display rather clear signs of autism.

Heck, look at Feynman, someone who people might assume to have good social skills.
Remember the pick-up story in ”Surely you’re joking, Mr. Feynman!”?

Haha, even when he did get the girl in the end, he didn’t seem to understand why.
Feynman seemed to just follow the advice blindly without understanding why it ought to work.
It’s like his ability to read people and understand them was severely limited.

Btw, Micke, have you watched the science fiction movie Primer (2004)?
Sounds like something you might be into.

It’s not about people, but rather, about ideas.
Most people I know find the movie exceedingly boring, because they’re interested in entertainment and people.

Where’s the movie is basically a multi-layered science fiction puzzle.
Multiple viewings may be required to understand what’s going on.

Primer: I’m a total sucker for science, sci-fi and not least time travel paradoxes. I am slowly working on a time travel book myself. I’ve seen Primer, but to brush up on it I read an analysis of it this morning. I love it.

I’ve never considered myself generally thorough – just sometimes – so feel free to send me a list of highly recommended sci-fi movies. Don’t bother to edit out the ones you are sure I’ve seen. The eye will automatically skip past those in an instant anyway.

Thanks for a great blog! Regarding oil: how would you get exposure to it (without paying too much fees)? I’ve looked at thing like SEB Olja S, but they look pretty expensive, if you need to wait for a while.

Also, I think you would enjoy listening to the Economist’s podcast “Babbage”. Check it out!

Even though I gained more than 100% on the 5x early this spring, this time I’m going slightly more long term by buying Delta 1x only. Specifically, I’m buying the “Olja S” ETF (from SEB I think) available through Avanza.

P.S. Disclaimer: This is simply what I am doing. I don’t officially recommend anything and won’t take responsibility for anything :)

Thanks for a great blog, I keep spreading it to friends and colleagues. Hopefully not the only woman reading it.

By mere curiosity, I got caught by “don’t like crowd events”, how do you feel and cope with that when you are, let’s say, at bigger parties (sensational parties in Ibiza etc)? Do you enjoy it or just feel trapped?

Wow! Thanks for helping spread the word you don’t have to be (or have) a dick to enjoy life.

You’re not alone but the ratio unfortunately is about 1:10. I guess that means you’re particularly talented to appreciate whatI write despite the male-centric tone and wording.

The bigger parties the better because my rational parts can easily make the math that nobody cares what I do. Also, alcohol helps 100%. Mingling sober, however, is all but impossible. Feels extremely awkward, as if I’m in the way. Usually, I make sure to go to parties with A) many people, B) of which many are friends and C) alcohol is not just accepted but expected :)